+1-415-670-9189
info@expertsmind.com
Determine the share price and corporate tax rates
Course:- Finance Basics
Reference No.:- EM1349709




Assignment Help
Assignment Help >> Finance Basics

Company A and B are two identical companies with equal asset values of $50 million. Company A is financed by equity only and has 100,000 shares outstanding. Company B has perpetual risk-free debt in its capital structure with a market value of $20 million. Company B also has 100,000 shares outstanding. The risk-free rate is 1%.

(a) Assume that there are no taxes. What is A's share price? What is B's share price?
(b) Can you create a portfolio that mimics the risk-return profile of Company A (1 stock of Company A) and consists of the risk free asset and Company B's stock? If yes, describe the portfolio.
(c) Company B wants to achieve its long-term target Debt-to-Equity ratio of 0.5. How much debt or equity does Company B have to buy back? Calculate the value of the debt and equity after the buy-back.
(d) Let's consider that the corporate tax rate is 35% (assume that the levered value of Company B is still $50 million). Analyze the scenario in part (c) with corporate tax rates. What is the value of debt and equity after the buy-back in part (c).
(e) Why are the market values of debt and equity different in parts (c) and (d)?

 




Put your comment
 
Minimize


Ask Question & Get Answers from Experts
Browse some more (Finance Basics) Materials
The Wall Street Journal, similar to other newspapers, has struggled against competition posed by the Internet and other electronic outlets. Discuss the effect that macroecon
Assume that the two projects are mutually exclusive and the cost of capital is 5%. Which project or projects should the company undertake? Base your results on the MIRR.
In planning to take the entrepreneurial venture to another country, describe the challenges and problems the venture may face. What guidelines will you provide for managers
XYZ Corporation has $4 million in earnings after taxes and 1 million shares outstanding. Compute the current price of the stock. What will the new earnings per share be? (Roun
Mark Weinstein has been working on an advanced technology in laser eye surgery. His technology will be available in near term. He anticipates his 1st annual cash flow from the
Expected earnings (EBIT) generated by the firm's assets are $3,000,000 per year and expected to continue into perpetuity. Assume agency and bankruptcy costs are zero. a. Ass
Ohio Quarry, Inc., has $12 million in assets. Its expected operating income (EBIT) is $2 million and its income tax rate is 40 percent. If Ohio Quarry finances 20 percent of
Based on the cash flow statement and personal balance sheet, do the Sampsons have adequate liquidity to cover their recurring cash flows and planned monthly savings in the l